Another wild day today. In the morning, the market is on its way to make a new low. Then when 1:00pm rolls around, the market started to turn and the DJIA rallied from down more than 300 points to close with a gain of more than 550 points. At the end of the day, the DJIA, SP500 and NASDAQ all closed with a gain of 552, 59 and 97 points respectively.
What drove the market to such a sudden and dramatic reversal? Definitely it wasn't any news about the improvement in the economy. Instead, there were more bad news about the economy and the recession. So what was it? From my perspective, I see two factors that caused the market to turn. One factor is what I called 'everyone is a technician' looking for the magic market bottom signal. When all the major indices excluding the DJIA went below the October low and bounced, all these claim to be technician saw a double bottom formation and proclaim the market has successfully tested the October low, therefore it is time to go long. The second factor is the short sellers that have been shorted the market in the last few days and got caught into this short squeeze when those longs started buying. These two group of market participants created this volatile upward move.
But was today really signaled a market bottom. No, not by any technical means. When we look back at today's move, it will be recorded as a 'dead cat bounce', a bear market rally. In order for the market to make a bottom, it need to make a new low. And today, it did not make a new low. Furthermore, this new low has to be a non-confirmed low. Just I have stated in previous post, when the market makes a bottom, there will not be much of fanfare, i.e. low volume. I will continue to monitor for the bottom signal, and in the meantime, I will look for opportunity to go short on any rally and won't let these bear market rally snooker me into a bull trap.
